The head of BNP Paribas' credit derivatives desk in Tokyo threatened to call in the regulator last week after competitors allegedly frontran a convertible bond issue by taking positions in the credit-default swap market. The problem occurred when dealers piled into the credit market two weeks ago to buy protection on Fujitsu before it became widely known that the company was about to issue a convertible bond. Stephane Delacote's complaints were sparked when credit-default swap volumes on Fujitsu increased three-fold in anticipation of a convertible bond offering (DW, 5/13). In a Bloomberg message sent to the major market makers and obtained by DW, he said, "This heavy trading reflects leaks of information and unfair trading." The message continued "we unfortunately will have no other choice than alerting regulators of any massive and unusual trading before the official announcements of a new CB issue." Delacote declined to comment on the matter. For full text click here.
Credit traders in Japan were split over whether dealers had acted improperly. Several said hedge funds solicited for bids for the seven-year JPY250 billion (USD1.94 billion) euro-denominated convertible bond may have piled into credit-default swap positions in advance of the convertible issue, which could then have tipped off dealers. Nikko Salomon Smith Barney was the lead manager for the deal but traders said Salomon was not active in this trade. Traders at the firm declined comment.
"My first reaction when I read the Bloomberg was, 'wow this guy's pissed off,'" said one credit head in Tokyo, adding that there is the possibility that funds may have used the information improperly. Another trader speculated that without client flows from the hedge funds that were solicited for the offering, BNP may have been blindsided by the activity.
"I sympathize with Stephane but it's hard to draw the line on this issue--it's just one of those unfortunate things that happens in the market," noted a credit trader. Traders said when the securities firm underwriting the bond is not doing most of the trading it is hard to prove wrong doing, especially if it is a liquid name.
"Some customers may have been in the wrong but I don't think dealers did anything inappropriate," added another trader. He said a similar problem may have occurred on a JPY29 billion convertible by Orix Corp. in Japan, which was issued last December. However, as it was a smaller issue and a less liquid credit the problem was not as widespread. He continued that although it would be difficult to prove if dealers acted out of line, Delacote's missive "put the market on notice."
Junichi Kamei, policy director and head of the Tokyo office at the International Swaps and Derivatives Association, said ISDA does not take views on such cases but it could be addressed by the credit derivatives working committee in Tokyo when it meets next month if it is of concern to the market.
Satoru Araki, international officer at the Securities and Exchange Surveillance Commission–the regulator--in Tokyo said, "It's our job to investigate insider trading," adding that if the regulator is approached regarding such activity in the credit derivatives market in Japan, it would investigate the matter.
